Bii Payments Ecosystem 2016 PDF

THE PAYMENTS ECOSYSTEM REPORT:
Everything You Need To Know About The Next Era Of Payment Processing
February 2016
Research Completed By:

Evan Bakker | Research Analyst
John Heggestuen | Managing Analyst
Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 1
Content
Key Points Page 3

1. Key Themes And Trends In Payments Page 6
2. The Ecosystem For Payment Processing Page 9
A. Stakeholders Page 10
B. Anatomy Of A Transaction Page 15
i. Standard Credit-Card Transaction Page 15
ii. PIN Debit Page 17
iii. Closed-Loop Cards Page 19
iv. Store And Loyalty Cards Page 20
v. Prepaid Cards Page 21
3. Payments Hardware And Software Page 23
A. Legacy Systems Page 23
B. Mobile Point-Of-Sale Page 24
C. Card Manufacturers Page 28
4. How Mobile Is Transforming Payments Page 32
A. In-Store Mobile Payments Page 32
B. Mobile Commerce Page 32
C. Mobile Peer-To-Peer Payments Page 36
D. Remittances Page 39
E. Carrier Billing Page 41
5. Alternative Technologies Page 44
A. Blockchain Technology Page 44
B. Connected Devices Page 45
C. ACH Page 47
D. Wearables Page 48
6. The Bottom Line Page 49

Key Points
 The payments industry is going through a period of rapid

transformation brought on by the transition to digital. That's
because payments is about transferring information from one party to
another, and nearly every stakeholder in the industry benefits when
that process runs on digital rails.
 2016 will be a watershed year for the payments

industry. Payments companies are improving security, expanding
their mobile offerings, and building commerce capabilities that will give
consumers a more compelling reason to make purchases using digital
devices.
 Payments is an extremely complex industry. To understand where

the next big digital opportunity lies, it's critical to understand how the
traditional credit- and debit-processing chain works and what roles
acquirers, processors, issuing banks, card networks, independent
sales organizations, gateways, and software and hardware providers
play. Card payments involve thousands of companies competing and
collaborating to facilitate transactions.
 Mobile provides the common ground for many of the biggest

leaps happening within the payments industry. Smartphones have
become the go-to computing device for every digital activity, and
payments is no exception.
o The groundwork has been laid out for mobile in-store

payments to gain traction this year. Major smartphone
companies, such as Apple, Samsung, and Google, have all
built mobile wallet platforms. Meanwhile, merchants are
inadvertently rallying behind a common mobile payments
technology — near field communication (NFC). A wide base of
potential users on the consumer and merchant sides should

unlock the potential of mobile payments this year. We forecast
US in-store mobile payments will grow from $120 billion in 2016
to $808 billion by 2019.
o New mobile buying options will accelerate mobile

commerce. Mobile browsing is skyrocketing. However, small
smartphone screens, spotty internet connections, and
cumbersome purchasing processes are keeping mobile
commerce from taking off. Payments companies are going after
this opportunity by releasing buy buttons to help ease the
friction of mobile shopping and capture a share of processing
revenue. As mobile shopping barriers drop, mobile commerce
will match PC commerce and eventually overtake it.
o Mobile peer-to-peer (P2P) money transfers will become

more common, and services will become more
competitive. Although P2P payments are thriving off social
commerce and network effects, their revenue potential remains
limited. P2P apps like Venmo will look to evolve into platforms
that come with other, more lucrative payment capabilities,
including in-store payments. Simultaneously, mobile wallets like
Apple Pay will likely add P2P capabilities to attract users.
o Remittances is another massive industry being

transformed by mobile. As with P2P payments, those who
send and receive remittances across borders are transitioning
away from cash and to mobile-based transfers. Legacy players
are seeing digital-based remittances drive growth, but these
companies will still face challenges around the massive
infrastructure they've built to handle cash transfers.
o Direct carrier billing offers the option to have the purchase

of goods added to a user's mobile phone bill. This provides
one of the easiest ways to pay on mobile, especially in
emerging markets where banking penetration is low. Although

fees for these services levied by the carriers are uncompetitive
in developed markets, carrier billers are beginning to take a
stab at these markets.
 Alternative technologies could disrupt the processing

ecosystem. Devices ranging from refrigerators to smartwatches now
feature payment capabilities, which will spur changes in consumer
payment behaviors. Connected devices could also incentivize
consumers to make payments outside of physical stores, which
ultimately threatens payments companies confined to those
environments. Likewise, blockchain technology, the protocol that
underlies Bitcoin, could one day change how consumer card payments
are verified.
Payments is a complex and rapidly evolving space. It involves an intricate

web of companies coordinating to power transactions in diverse
environments. Demand for digital goods and services is forcing payments
companies to build new business models. This means that a different
hierarchy could emerge in the payments industry as startups find entry points
into the market and as incumbents adapt to digital.
In this report, we offer a high-level look at the payments industry — how it

functions, who the key players are, and what trends are shaping the industry.
This report provides a compendium of all our most important research and
analysis on the payments industry. We'll start by seeing how last year's key
events will help shape this year's payment trends. From there, we'll explain
traditional card processing, in addition to prepaid, store cards, and PIN debit
transactions. Then we'll dive into the most important developments brought
on by mobile and look at what could be the next technologies to disrupt
payments.
The analysis and diagrams that follow are simplified, and the lists of
companies included in the infographics are not exhaustive — they're meant to
be an introduction to the players and trends in the space.

Click here to download a PowerPoint presentation of the diagrams »
Click here to download the charts and data in Excel »
Key Themes In Payments: 2015, 2016,

And Beyond
The makeup of the payments ecosystem has changed measurably over the
past year, as many online and mobile-focused players have established
themselves alongside legacy providers.
Five key events marked 2015 as a critical year for the payments
ecosystem and will have broad implications for 2016:
 New security standards were implemented. EMV — short for

Europay, MasterCard, and Visa — is a set of security standards
created by major card networks to better protect card-present data.
The standards have been used internationally for years, and the US
officially migrated to this standard on October 1, 2015. This has
bolstered the security of card-present payments. However, it's also
widened the security gap between in-store and online commerce,
making the latter more attractive to fraudsters. The rollout of EMV
could also inadvertently boost in-store mobile wallet adoption. If
merchants are ordering a new, EMV-compliant terminal from a major
provider like Verifone or Ingenico, it's likely that device will also accept
NFC payments through mobile wallets such as Apple Pay. In the long
run, EMV will help universalize NFC technology, which will give mobile
wallets an opportunity to compete squarely with traditional methods of
payment.
 Mobile wallets flooded the market. Apple Pay was the only major
digital wallet of 2014; however, 2015 saw competitors and
collaborators launch wallets of their own. Android Pay, Samsung Pay,
Chase Pay, and Walmart Pay were all released last year, reflecting the
significant opportunity companies see in this service. This means a

majority of smartphone users in the US will have access to mobile
wallets. And with NFC terminals more widely available in stores, they'll
also have places to use those mobile wallets. There's a possibility that
consumers will be hesitant to adopt mobile payments, but we expect
that they'll see success, as many consumers have become
increasingly dependent on their smartphones.
 Mobile commerce matured. Although consumers have made mobile

phones their primary computing device, they haven't relied on them to
make purchases, largely because of their small screens, spotty
internet service, and lengthy mobile checkout process. However, a
number of smartphone manufacturers have committed to making
phones with larger screens, and a bevy of payment companies have
integrated one-click buy buttons into online checkout pages.
Smartphones have also adopted biometric technology that enables
people to buy things with their fingerprint. These features have made
purchasing on mobile easier, which will spur a significant spike in
mobile commerce.
 Software services moved to the foreground for merchants. Many

new mobile point-of-sale (mPOS) devices are extremely cheap for
merchants to purchase. To further increase the stickiness and utility of
these products, terminal vendors are stocking the devices with
software platforms that contain business management tools and even
working capital programs. Software-centric terminals are giving small
businesses access to enterprise-grade services that can help them
optimize workflow and sales. mPOS also gives software providers an
opportunity to sell their products directly to merchants, which threatens
to disintermediate traditional sellers. Ultimately, stakeholders
throughout the ecosystem have an opportunity to earn new revenue as
small merchants start accepting card payments.
 Alternative payment infrastructures received heavy

investments. A blockchain is a public ledger, or list of transactions,
involving Bitcoin. Recently, we've seen a surge of investments in this

technology, as various banks, tech giants, startups, and payments
companies begin exploring its applications outside of Bitcoin. Visa
Europe, for instance, started exploring the blockchain as a tool for
routing cross-border transactions. The blockchain relies on a
distributed ledger that is publicly verified by a network of users,
eschewing the need for an intermediary or central authority. We
expect the blockchain to first impact interbank transfers, however, it
could eventually make its way into consumer card payments, at which
point intermediaries such as card networks could be in trouble.

The Ecosystem For
Payment-Card Processing
To understand each of these trends and how they might alter the broader
payments landscape, it's first critical to understand the complicated card-
processing pathways and the diverse set of players interacting to push
through countless transactions for consumers and businesses.
The payment transaction is the foundational process that the payments

industry is built on. There are five types of businesses in the payment-
processing ecosystem. Before getting into how a card transaction is
processed, we'll define each of these types of businesses.

Acquirers And Processors
Acquirers are typically banks that work with merchants to allow them to
accept payments. Acquiring banks, such as Bank of America and Wells
Fargo, are responsible for providing merchants with most of the systems they
need for accepting card payments. These systems include payment
terminals, processing services, and a bank account into which settled funds
from purchases can be deposited. They also assume risk associated with
card transactions, although risk is often mitigated by being selective about the
merchants with whom the acquirer chooses to partner. Acquirers are
members of card networks like MasterCard and Visa (discussed later).
Processors are responsible primarily for data transmission and

security. We lump processors in with acquirers because some acquirers,
such as Chase Paymentech, process transactions in-house. Other acquirers
contract a third-party processor, such as First Data, to handle transactions.
There are two types of processors in the payment-card system: front-end

processors and back-end processors.
 Front-end processors route transactions from merchants to the

cardholder's bank to gain authorization, i.e. make sure a customer has
enough available credit or funds to make a purchase.
 Back-end processors are responsible for a fund's settlement, which

ends with the merchant receiving a deposit for transactions.
Some processors have a salesforce that directly seeks out business from
merchants, but often they outsource this function to independent sales
organizations, or ISOs. (For more on ISOs, see below.) Acquirers may also
use a salesforce to sell services to large merchants, but this is less common.

Issuing Banks
Issuing banks, or issuers, provide consumers and businesses with debit and
credit cards connected to checking or credit accounts. They are the bank
named on a customer's credit or debit card, and hold the customer's deposits
or credit associated with the account. The same bank may also serve as a
merchant's acquiring bank — the name denotes a service provided rather
than a unique business entity.
Card Networks
Card networks are commonly assumed to be the issuers of credit, since these
are the businesses most closely associated with credit card payments. But for
the largest networks, Visa and MasterCard, this isn't the case. (American
Express and Discover are distinct in that they do provide credit and act like
issuing banks.) Card networks act as a kind of hub within the card-processing
ecosystem and serve two main functions: routing transactions between
issuers and acquirers, and setting the rules by which everyone operates. As a
kind of governing body, a card network also sets the interchange fees
charged by issuing banks, establishes rules for membership in the network,
and resolves disputes between different parties. One caveat is that a national
government can override a card network's fee terms and set limits on these
fees.

Independent Sales Organizations
And Merchant Service Providers
ISOs and Merchant Service Providers (MSPs) are entities that sell payment-
processing services to merchants on behalf of acquirers/processors but are
not banks. They also sell or lease payment terminals. They are feet-on-the-
ground salespeople and often operate regionally. It would be too
cumbersome a task for a big bank to sell its products to millions of merchants.
Instead, ISOs and MSPs fill this role. They also provide merchants with
customer service and ensure merchants' acceptance devices are up and
running. Once a merchant chooses an acquirer/processor and a terminal, the
ISO or MSP is the point of contact with the merchant.
There is no significant difference between an ISO and an MSP; MSPs are

registered with MasterCard, whereas ISOs are registered with Visa.
ISOs and MSPs are among the businesses being directly and immediately
disrupted by new mobile payments technologies. These companies are being
forced to change their business model as merchants begin adopting mobile
points-of-sale (mPOS). In the past, businesses bought bulky and expensive
POS devices, giving an opportunity for ISOs, MSPs, and others to service
them. However, new mPOS devices can be purchased for relatively little cost,
sometimes even in retail stores, and so servicing these devices is less
necessary since a broken device can be easily replaced.
As mPOS drives down the overall cost of physical devices, a higher

value is being placed on added software services. Two types of vendors
are playing a sizable role in the selling of payment technology:
 Independent Software Vendors (ISVs) create business-related

software platforms, usually for a wide audience, which they can sell
directly to merchants or to other sellers.
 Value-Added Resellers (VARs) integrate pre-made software

products, like those made by ISVs, and integrate them into hardware

devices such as computers or terminals. The finished product is then
sold to merchants.
These organizations specialize in software, giving them an advantage over

traditional selling agents as merchant demand for software services rises.
Software vendors are now interfacing directly with merchants and in some
cases, controlling the relationship with the merchant. Some software
companies are even becoming ISOs themselves.
But implementing a full POS system will continue to require a series of

different companies. Demand for software will give ISVs and VARs a
greater influence over the selling process, but selling organizations that have
partnerships with major acquirers will still play a role. Each group has a
different set of specialties that will be more or less valuable depending on the
specific merchant served and the specific set of services offered.
Nevertheless, traditional selling agents will have to gain more knowledge
about the software on the systems they're pitching in order to remain
relevant.
Payment Gateways
Payment gateway businesses are specific to e-commerce companies, serving

essentially as the online version of a payment terminal and a front-end
processor for online businesses. Gateways like Stripe act as the portal
through which e-commerce merchants connect to acquirers. In addition, they
usually provide added services like analytics and reporting for their
merchants.
Gateways have begun to play a more significant role in the ecosystem as

merchants build an online presence. Gateways are also being propped up
with massive investments. For example, Stripe received an undisclosed
investment from Visa that valued the firm at $5 billion. Meanwhile, Klarna, a
Sweden-based company with an online checkout platform that also functions
as a gateway, recently hit a $2.25 billion valuation and is now operating in the
US.

As more merchants develop mobile channels, gateways that specialize in
mobile will have even more opportunities for growth. For example, PayPal-
owned Braintree, a mobile-focused gateway, grew 111% YoY in terms of
cards on file in Q4 2015.
We expect gateways to play a more significant role in card processing in

2016 as consumers continue to move more purchasing online.

The Anatomy Of A Card Transaction
There are three stages to payment-card processing, and each player

outlined above is involved in one of these stages, either directly or
tangentially.
To illustrate each stage, we'll use a $100 credit-card transaction as an

example.
1. Authorization
A customer elects to make a $100 purchase with a credit card. When she
swipes her card at a payment terminal, the transaction data goes through the
merchant's payment terminal to the acquiring bank. The acquirer then sends
an authorization request to the card network, and the card network routes that
request to the cardholder's issuing bank. If credit or funds are available and
the card hasn't been reported lost or stolen and isn't otherwise flagged as
suspect, the issuing bank relays an authorization code back through the card

network to the acquirer. The acquirer then relays it back to the merchant.
Once the merchant receives the authorization code, the transaction is
complete.
Of course, this all happens in seconds. The next stages in payment

processing are more drawn out.
2. Batching And Clearing
While the transaction goes through from the consumer's point of view after
authorization, and the individual can walk out of the store with her purchase,
the merchant hasn't actually received any money. Before the merchant can
receive funds, all the day's transactions need to be batched and cleared.
At the end of the day, the batch — an aggregation of all the transactions that
take place over the course of a day — is sent to the acquirer. The acquirer
requests payment on behalf of the merchant by sending a history of the day's
transactions to the appropriate card networks. The card network then divides

the transactions according to which bank issued the card and sends a
request for funds to the appropriate issuing bank.
3. Funding
Once the issuing bank receives a request for funds, money actually begins to
move. The issuing bank sends the requested amount back to the acquirer via
the card network, minus an interchange fee that amounts to about $1.75. The
card network takes out an additional $0.18 in the form of an assessment fee
and passes the funds to the acquirer, which completes the clearing process.
In the final stage, the acquirer subtracts a discount fee of about $0.07 and
deposits the remaining amount in the merchant's account.
There are two important caveats:
 Debit-card transactions confirmed by a PIN are settled through a

different process. In a PIN debit transaction, the customer enters their
4 to 12 digit PIN number at the point-of-sale after inserting their card.

The payment is then routed through a debit network, such as ACCEL.
The issuer debits a customer's account immediately, and a clearing
and settlement command is communicated in the same step, meaning
the merchant is guaranteed payment from the issuing bank, Jeff
Guthrie, chief sales and relationship officer at Moneris, told BI
Intelligence.
 Transactions can also be settled in real time, meaning these

transactions are cleared individually instead of in a batch. The
advantage of this form of processing is that it's faster, but it's also
more risky in terms of security and more expensive for merchants. It's
typically used by high-volume business and e-commerce companies.

Other Types Of Transactions
Closed-Loop Transactions
Visa and MasterCard — which represented 70% of payment-card transaction

volume in the US in 2014 — partner with issuers and acquirers to handle
payments. However, American Express and Discover operate "closed-loop"
networks in which they simultaneously play the role of issuer and card
network, and sometimes acquirer. Most importantly, this means they lend
credit to consumers directly. Visa and MasterCard, on the other hand, are not
banks and only route the transaction.
In a closed-loop transaction, the POS terminal's processing engine reads a

card's Bank Identification Number (BIN) associated with a closed-loop
network, which essentially commands the processor to send the transaction
down a specific pathway. The authorization request then passes through
either the merchant's general-purpose acquirer or the closed-loop vendor's

acquiring service. In either case, once the request reaches the network, the
closed-loop vendor takes over, routing the request to its issuing bank, which
evaluates the funds in the account. The vendor either approves or rejects the
authorization request depending on the level of funds in a customer's
account.
American Express used to provide acquiring services but has since de-
emphasized this side of its business. American Express operates as both
network and issuer, and also has the ability to serve as a merchant's acquirer.
However, in order to achieve wide distribution, Amex has over time allowed
merchants to use their existing acquiring bank to handle Amex transactions,
according to Guthrie.
The closed-loop payments scheme has some distinct advantages, chief

among them customer insights. Closed-loop vendors can gain information
about their members' shopping habits, because they have access to
customers' spending and balance history. These kinds of insights enable
closed-loop networks to optimize things like rewards programs to drive even
more added sales from cardholders.
Store and loyalty cards, formally known as private-label cards, often act
as closed-loop cards. Store cards are branded with a merchant's logo and
often do not have a general-purpose card network displayed on the card.
These cards are issued by a third-party bank — such as Synchrony Financial
— that provides acquiring, routing, and issuing services on behalf of the
merchants. In some cases, however, store cards are open-loop if they are
labeled with a card network.
These cards are used by some of the largest merchants, like Target and
Macy's, because they give customers access to merchant-specific deals, and
they also give merchants a chance to extract bigger sales from their most
loyal customers. We expect these cards to increase in popularity as they
become available for use in mobile wallets. Mobile wallets bypass the
frustration of having too many store cards in a physical wallet.

Prepaid-Card Transactions
Prepaid cards act like standard debit cards, however, funds must be
preloaded in order for a transaction to be processed. American Express'
Bluebird is an example of one of these. Because cards must be preloaded,
the cards don't allow customers to accrue a negative balance, which prevents
overdraft fees. As objects of stored value that don't require a bank account or
credit check, prepaid cards appeal particularly to the financially underserved.
But as prepaid products have become more robust and consumer attitudes
have changed since the financial crisis, their appeal has grown for both the
banked and unbanked at all income levels.
A prepaid-card transaction operates exactly like a non-PIN debit card

transaction in terms of structure: The transaction flows through a merchant
processor, acquirer, general payment network, and issuing bank. The vast
majority of prepaid cards leverage Visa's or MasterCard's payment network,
although American Express now processes a decent volume of prepaid-card
transactions. Discover processes a very minor share of prepaid-card
payments.
Despite these similarities, interchange fees can differ greatly. Prepaid

card issuers often have assets under $10 billion, exempting them from the
Durbin Amendment, which sets caps on the interchange rates imposed by
card networks. Issuers exempt from this amendment can charge a higher
interchange rate than larger issuers.
Reloads are a key factor differentiating prepaid from traditional

debit. Prepaid cardholders almost exclusively reload their cards by handing
cash to a merchant at the POS.

To make a cash-based reload, a prepaid-card customer gives a store clerk
the amount they want reloaded in cash plus a reload fee, which varies by
retail location, but is either free or a few dollars. A funding request is sent to
the appropriate issuer, which immediately deposits funds into a user's
account. The merchant then settles with the issuer at a later time or date.
Separate networks, such as Visa ReadyLink and Green Dot, process
reloads. The reload network acts similarly to a traditional payment network
like Visa or MasterCard, but is partitioned from the POS' general network and
only helps route reload-related payments. Click here to read more details
about the prepaid-card industry.

Hardware And Software Powering Payments
As we've discussed, there are five types of players in the payments-

processing ecosystem. Companies that make payments hardware and
software are the unofficial sixth member of that ecosystem, though their role
is indirect. They do not participate in the processing aspect of payments, but
rather create solutions that merchants use to run cards and manage
payments. Together with plastic cards, payments hardware is the most visible
aspect of the payment-card ecosystem.
Legacy Acceptance Hardware And Software
Legacy acceptance hardware providers develop and sell card readers to

distributors. Distributors can be processors, acquirers, or ISOs depending on
each organization's business model. Two providers, Ingenico and VeriFone,
dominate the acceptance hardware industry in most markets.

On the legacy software side, which covers products for front-office functions
like order entry and back-office functions like inventory management, NCR
and MICROS stand out as significant players. But a lot of crossover exists;
hardware requires an operating system to act as a user interface, and
software requires hardware for data input. Data from a card transaction might
enter NCR's transaction management software via an Ingenico terminal, for
example.
Legacy providers have been particularly successful at winning and

retaining the business of the largest merchants because they have the
resources to create customized solutions for large enterprises with specific
needs. These systems are very robust, meaning that upgrades can be
challenging to implement and can involve on-the-ground software
consultants.
These companies have also created systems for small- to medium-sized

businesses (SMBs), such as NCR's Aloha, which is targeted at restaurants.
Mobile Point-Of-Sale
The payments hardware and software space is going through a period of

massive innovation with the advent of the mobile point-of-sale
(mPOS). Startups like Square and ShopKeep have pioneered software and
hardware for accepting payments via tablets and smartphones. These
products are often cheaper than legacy solutions, but many are not rugged
enough to sustain heavy usage.
mPOS has entered the industry through the small business merchant
segment, because many of these merchants want cheaper and more portable
products as a way to begin accepting card payments. These devices also
come with software that gives smaller merchants access to enterprise-grade
management services.

mPOS devices often contain app marketplaces with apps that solve specific
needs like inventory management, marketing, loyalty, and payroll. In this way,
businesses can download the apps they want, giving them a customized
solution similar to the ones legacy providers deliver to large firms at a much
higher cost.
These apps can even help merchants analyze things like foot traffic,
weather, and supply in order to optimize sales. Higher sales also benefit
the mPOS processor because they earn revenue by taking a cut of the
merchant's transactions. Further, the app marketplaces are open systems
and can be updated over-the-air, giving clients a constant feed of new
management options at little-to-no cost.
The move to mPOS will continue to put pressure on hardware providers as

well as ISOs, which have traditionally sold legacy hardware. mPOS
companies, on the other hand, often do not use an outside salesforce.
Merchants themselves buy these relatively cheap solutions directly from

stores or online. Square, for instance, sells its reader at Duane Reade
stores.
Although small merchants are gravitating toward mPOS, these devices

haven't attracted large enterprises. Beyond durability issues, mPOS
manufacturers don't have the scale or resources to build a custom device for
a specific enterprise.
For example, Square partnered with Starbucks in 2012, making Square the
exclusive processor for the coffee giant in US stores. But while the
partnership initially seemed successful, it actually weighed Square down. The
company registered a net loss of $28 million by 2014. The program will be
phased out by Q3 2016.

Over time, as the software capabilities of mPOS devices improve and
become more scalable, these devices will serve the needs of large
enterprises. This, along with continued penetration into the SMB segment, will
drive mPOS adoption. By 2019, we forecast that nearly 80% of US retailers
will have implemented an mPOS device.
mPOS is also a positive force in the industry because it helps many

small businesses move beyond cash-based payments. Companies like
Square have largely onboarded micro-merchants to its systems — merchants
with under $125,000 in sales made up 63% of Square's customers as of Q2
2015. These are merchants that likely didn't have payment systems in place
before. In this way, Square is expanding the addressable market for others in
the payments ecosystem, like card networks, since mPOS helps a greater
number of lower-tier merchants in the US take card payments.
Click here to read our in-depth report on the impact of mPOS.

Card Manufacturers
Card manufacturers make the plastic cards that are issued through the
cardholder's bank. Companies that produce cards for banks are currently
benefiting from two trends:
 Data breaches. Every time there is a massive data breach, like those
suffered by Target and Home Depot, banks must reissue credit and
debit cards, giving business to card manufacturers. In addition to the
cost of the cards, these banks incur additional fees from card
manufacturers because card reissues require manufacturers to disrupt
their normal order flow.
 The EMV migration. US banks are also in the midst of reissuing cards
to comply with the October 2015 EMV deadline. This will give card
manufacturers a boost in activity.
But growing interest in mobile payments will hurt the card-

manufacturing industry. As people become less reliant on physical cards
and store their card numbers online and in apps, banks may reissue
customers' cards less frequently. Larger manufacturers like Oberthur and
Gemalto have already recognized this trend and are developing other
technologies to combat obsolescence. Oberthur is helping develop Secure
Elements, a piece of phone hardware which stores card data to enable
mobile payments, Philip Andreae, Oberthur's vice president of field marketing,
told BI Intelligence.
Smartphone providers are also tangentially part of this

ecosystem. Smartphone vendors like Apple and Samsung now participate in
this ecosystem because they provide the overall hardware enabling mobile
wallets. However, the ability to make transactions isn't the main purpose of
these devices, which is why we chose not to include them in our infographic.

How Mobile Is Transforming The
Payments Ecosystem
As we've said, technology is affecting every aspect of the card-processing

ecosystem, even as the basic structure of payment processing remains
relatively unchanged. In this section, we'll look at how mobile is creating new
ways to pay in stores and online. Mobile won't change the underlying
anatomy of a transaction, but it will change the customer experience and
could give different stakeholders an advantage over others.
In-Store Mobile Payments
Mobile wallets — apps people use to pay in stores — excite retailers because
they can offer rich data about a customer's transactions that can be used to
improve the customer experience, increase foot traffic, and lead to larger
sales. Developing technologies such as biometric authentication for mobile
payments also promises to reduce the fraud burden on banks and merchants
alike.

Mobile in-store payments have moved from novelty to a viable method of
payment in the US for a few key reasons:
 Apple, Samsung, and Google all have wallets. In 2014, Apple was
the only new major wallet on the market. However, last year Google
and Samsung both released digital wallets of their own. Mobile wallets
now have a massive potential user base since they are featured on
smartphones from all major phone manufacturers. In addition, these
wallets all rely on near field communication (NFC) technology, a type
of contactless communication between two devices. Now that NFC
offers a clear preferred mobile acceptance technology, merchants can
begin adopting the appropriate corresponding payment terminals.
 The EMV migration has also lead to merchant adoption of NFC

terminals. The implementation of EMV as a security standard in the
US has forced merchants to upgrade to EMV-compliant terminals,
which come bundled with NFC technology as well. 80% of the
terminals Verifone sold in the US during Q1 2015 were NFC-
capable. Click here to read more about the EMV migration.

Now that the infrastructure is in place, here's why mobile in-store payments
could take off:
 The smartphone has become the consumer's primary computing

device. Consumers are completing an array of tasks on their mobile
phones, and younger consumers in particular are glued to these
devices. This dependency on smartphones makes them more likely to
explore payment options on the devices as well.
 Chip cards have caused headaches that could encourage the use
of alternative payments. Chip card acceptance has become
problematic because merchants have been inconsistently rolling out
EMV-compliant terminals. Moreover, inserting a chip-based card into a
terminal requires a wait time that consumers, and even merchants,
might not like. These headaches could influence customers to try
contactless mobile payments, which are often faster.
 Mobile companies are providing adoption incentives. Samsung

and Google are not only advertising their wallets on TV and online, but
they're also offering things like gift cards when customers adopt their
wallets.
 Rewards cards can be linked to them. Store cards and rewards

cards can now be loaded in mobile wallets, which gives consumers an
easier way to store all of their cards. Moreover, the ability to rack up
rewards through these wallets gives consumers added incentive to
use them.
 One of the major wallets can be used almost anywhere. Samsung

Pay uses magnetic secure transmission (MST) technology that makes
it compatible with almost any terminal, including those legacy
terminals that only accept magnetic stripe-based cards. This
advantage could lead to heavy adoption and frequent usage.
 The security behind mobile wallets could encourage merchant

and consumer adoption. Apple Pay, for example, limits the

merchant's fraud liability because sensitive payment data never enters
the merchant's system. The prospect of avoiding security breaches
could push more merchants to adopt mobile wallets like Apple Pay,
giving consumers even more places to use them. Click here to read an
in-depth description of the security behind Apple Pay.
Due to these and other factors, we forecast US in-store mobile

payments will grow from $37 billion in 2015 to $808 billion by 2019. This
will partly be driven by increased mobile in-store payments among
millennials. In Q3 2015, over one-quarter of millennials surveyed had made
an in-store mobile payment over the course of a month, according to the BI
Intelligence Digital Banking Survey. To read our latest mobile payment
forecasts, click here.
Mobile Commerce
Mobile commerce involves any payment made on a mobile phone without

interaction at a physical payment terminal. This sector is poised to disrupt
traditional forms of shopping as millennials — the largest working generation
in the US — become more familiar with buying on mobile.
Mobile is already on par with PCs as a retail browsing tool.
 18- to 34-year-olds spend 43% of their retail browsing time on a

smartphone, equal to the 43% they spend on PCs.
 20% of millennials are "mobile-only," meaning they only use a mobile

phone as their digital device. This indicates smartphones may
overtake PCs in terms of purchasing activity among this demographic
as they improve in design and capability.

High browsing traffic has already translated to a significant level of
mobile purchasing. A slim majority — 51% — of millennials have made a
purchase on their phone over the course of a month, according to the BI
Intelligence Digital Banking Survey.

For now, mobile still isn't close to driving conversions at nearly the
same rate as PCs. Mobile shoppers only complete a purchase 1.3% of the
time, compared to 3.7% on PCs, because smartphones have smaller
screens, spotty internet connection, and perhaps most importantly, poor
checkout options.
Payments companies are lowering this barrier with the use of one-click
checkout buttons. As mobile shopping proliferates, a bevy of digital
payments companies have developed faster checkout pages to try and boost
conversion rates. These checkout options require as little as one click for a
customer to make a purchase. For example, consumers can use their PayPal
accounts to buy something with PayPal's One Touch. Meanwhile, companies
like Klarna allow people to click a button and pay for the item later.
Expedited checkout buttons are proliferating because they benefit

everyone in the value chain:

 Customers have a better shopping experience. Expedited checkout
buttons ease the friction of making an online purchase because
customers don't have to enter as much information.
 Merchants see higher conversion rates. 86% of customers who use

Visa Checkout
— a one-click buy button that lets consumers make purchases online
and on mobile without having to manually enter their payment
information each time — end up finalizing a purchase, compared with
just 57% for a traditional checkout customer. This brings in more sales
for a merchant.
 Payment companies see higher transaction volumes. Because buy

buttons are low-friction, they make it more likely that a shopper will
complete a purchase. This boosts transaction volume, which gives the
payment providers more processing revenue.
Given all these incentives throughout the value chain, we expect major
stakeholders to emphasize checkout buttons, which will slowly increase
conversion rates on both mobile and desktop. Similar buying options could
help mobile conversion rates reach parity with PC conversion rates. This will
position mobile commerce to match PC commerce and eventually overtake it
as mobile becomes the dominant computing device for consumers.
We expect mobile commerce to nearly match PC commerce by 2020. US

consumers will spend $284 billion on mobile, representing about 45% of that
year's total US e-commerce tally.
Click here to read more about how mobile checkout options are lifting mobile
commerce.

The one major challenge for payments companies as they push mobile
commerce is that card-not-present fees, which are charged for mobile and e-
commerce transactions, are higher than card-present fees. But merchants will
not want to pay more money to processors. It's possible that biometric
authentication features like the iPhone's Touch ID will strengthen security to
the point where card networks will be forced to lower their rates.
Mobile Peer-to-Peer Payments
US domestic peer-to-peer (P2P) payments transacted with any type of

payment instrument, including cash, reached about $540 billion in 2014,
according to our estimates. We forecast that P2P payments transacted on
mobile devices will grow from $5.6 billion in 2014 to $174 billion by 2019 and
from a 1% share of total P2P payments last year to 30% by 2019.

P2P payment apps like Venmo have taken off in the US market in the last few
years, and we expect volume, transactions, and users to continue to grow as
people recognize that these apps solve real problems. The ability to transfer
money in real time via a mobile device is much easier and faster than writing
a check or going to an ATM to get cash. Venmo has shown the potential of
mobile P2P, having processed $2.5 billion in transactions in Q3 2015, a
growth of 174% from the $906 million the app processed a year earlier. This
app, in particular, has also benefited from network effects, since much of its
activity derives from social situations.
The P2P model will become bundled with other services. Rumors
recently surfaced that Apple was exploring the integration of P2P features in
Apple Pay, and Facebook has already implemented P2P transfers in its
Messenger app. Venmo is now reversing this trend, moving from P2P to other
capabilities, namely, in-store and online commerce.
P2P is ultimately a way of driving social commerce and bringing in new

users through network effects, however, the revenue potential is fairly

limited if it enables bank-to-bank transfers. These types of transfers cost
very little to process since they pass through clearing houses, and, as a
result, these transactions almost never include fees for consumers. In this
way, P2P is a platform to attract users that a company can eventually
monetize. We therefore expect smartphone vendors like Apple to implement
P2P as a way of building a sizable user base for Apple Pay.
Once companies like Apple do this, it could weaken Venmo. That's

because once Apple devices have similar P2P capabilities alongside a much
more established in-store payments network through Apple Pay, merchants
will likely support it over Venmo's model. Apple benefits from a huge
established base of smartphone users and strong brand trust. It is possible
that Venmo could proliferate in stores via its parent brand, PayPal, however,
PayPal hasn't developed a very robust in-store presence.
To read more about P2P payments click here.

Remittances
Remittances — money sent to friends and family abroad — are undergoing a

rapid transformation as a result of the migration to mobile. The industry is
massive — $583 billion was remitted across borders in 2014, according to the
World Bank, for revenue of about $34.3 billion, according to our estimates. In
the past, remittances required a network of brick-and-mortar partners that
could accept and pay out physical cash. That meant that in order to be
competitive, remittance businesses had to have capital available to develop
these networks in a lot of different countries. This barrier to entry limited the
global market to a few players — such as Western Union, MoneyGram, and
Ria — that charge high fees.
In recent years, fees have started to fall as digital-first startups like Azimo and
TransferWise have undercut the transfer fees of established players.
Although we estimate that 94% of remittances in 2014 still involved cash on
the sending or receiving end (or both), that number will change as
smartphones proliferate.
In fact, digital is the fastest-growing segment for giants like Western Union,
which now earns 7% of its revenue through online and mobile channels. The
firm's digital revenue grew 28% year-over-year (YoY) in its consumer-to-
consumer (C2C) segment during Q3 2015, compared with just 3% overall
C2C revenue growth. This came as a result of the rapid growth of its digital
business in the US. It also expects future growth to come from the 33 other
countries where it now has an online presence.

Startups are already outpacing some legacy providers in digital.
 Xoom, a digital-first company, earned $46 million in Q2 2015, more

than MoneyGram's "self-service" revenue, which includes online,
mobile, and self-service kiosks in retail stores.
 This made Xoom, a company founded in 2005, the second-largest US-

based digital remittance company.
Legacy players will struggle to maintain their grip on this industry over time as
digital grows its share of transfer activity. However, remittances on the
receiving end won't migrate to digital nearly as quickly as on the sending end,
giving legacy firms a buffer. This is because people in many receiving
markets tend not to have bank accounts that they can link to digitally and thus
will need to continue to pick up cash at physical remittance storefronts.
Click here to see a detailed report explaining the remittances industry.

Carrier Billing
The carrier billing market is projected to grow from $14.5 billion in 2014 to
$24.7 billion in 2019, according to Ovum. The payment method allows
consumers to make purchases by adding the value of a transaction to their
mobile bill. It's primarily used for purchasing digital goods like apps and
music, but in some instances it's used for making purchases in the real world
as well. Carrier billing has major potential as an alternative payment method,
however, the transaction fees are high, which can drag down sales potential.
Carrier billing has the most potential in emerging markets because payment-
card penetration is often low in these countries, whereas mobile phones are
fairly common. Since many people do not have payment cards in these
countries, app developers are willing to pay the steep fees demanded by
carriers if the choice is between some revenue and no revenue.
In developed markets, carriers take a large cut of purchase volume,

sometimes exceeding 30%, which is much larger than the typical cost of a

card transaction. There's little incentive for a merchant to adopt carrier billing
when people in the developed world have many other ways to pay.
Nonetheless, carriers are starting to dip their toes into developed

markets, despite the challenges.
 Apple quietly launched carrier billing services for Russian iPhone

users in partnership with carrier billing company Boku and Beeline,
Russia’s third-largest mobile network operator (MNO). The tech giant
had launched its first carrier billing endeavor in Germany earlier in
2015.
 Microsoft and Boku partnered to launch carrier billing for US Windows

users who subscribe to Sprint. Customers will be able to use the
service on any device that runs Windows 10. The company expects
the service to expand to more mobile carriers in the future, with an
international launch due in 2016.
 As part of its September 2 launch in Japan, Netflix announced an

exclusive, "fully integrated" partnership with SoftBank Group Corp., a
Japanese telecom. The partnership will enable customers to pay their
Netflix subscription with SoftBank carrier billing, meaning they can add
the cost of their Netflix account directly onto their mobile bill.
Direct carrier billing companies tout high conversion rates as their

distinct advantage over other payment methods. In-app conversion rates
for customers shopping with direct carrier billing average 56-68%, compared
with average in-app credit card conversion rates of 8-11%, according to the
UK-based direct carrier billing company, Bango. Conversion rates are higher

for direct carrier billing because the process is more frictionless, enabling a
customer to direct the purchase to their mobile phone bill. In-app credit-card
payments are more cumbersome because a first-time user has to enter all
their credit-card information, and they usually abandon the purchase.
Although conversion rates are higher, direct carrier billing purchases are
relatively low, running between $4.00 to $4.50 on average at Bango,
according to Richard Leyland, a former vice president of marketing at Bango.
Carrier billing isn't a significant threat to the payment-card industry as a

whole, but it could become a significant niche competitor to cards in the
growing digital-goods market.
To read more about the carrier-billing market, click here.

Alternative Technologies Disrupting The
Current Payment-Processing Ecosystem
Two emerging phenomena could fundamentally alter the processing

ecosystem — the blockchain and connected devices.
Blockchain Technology
Blockchain is the name given to the software underlying the Bitcoin protocol.
In the Blockchain system, transactions are publically available in a historical
ledger and transactions are verified through the solving of mathematical
equations by various entities and most often performed by computers. What
makes the Blockchain unique is that because the record is public and verified
by multiple entities, all activity is crowd-monitored, evading the need for a
central authority. Although it's traditionally associated with Bitcoin, this
software can be mimicked to power other types of payment processes using
other currencies.
Financial institutions have recognized this opportunity and are now

investing money in blockchain projects. UBS, Santander, Visa,
MasterCard, and others have devoted resources to exploring a variety of
applications of this technology.
Given investments in the blockchain and its broad applicability in

financial services, it's plausible the technology could disintermediate a
number of processes.
 Inter-bank transfers: R3 CEV, a blockchain startup looking to

develop a global open-source blockchain, recently completed its first
inter-bank transfer using blockchain technology. The participating
banks simulated exchanging value on a private cloud-based
distributed ledger, allowing them to bypass clearing houses. The
blockchain will likely first disrupt these types of transactions,
considering it's already being tested by major banks.

 Payment card transactions: Card transactions could be verified by a
group of users instead of networks like Visa and MasterCard. The lack
of a central authority could reduce processing fees, which would have
major ripple effects; merchants would save on costs, issuers would
lose interchange revenue, security could improve, and card networks
could be de-emphasized or eliminated altogether. Should this scenario
occur, chances are it wouldn't happen for a long time, however.
 Cross-border transactions: Card networks could increase the

efficiency of cross-border transactions using blockchain technology in
categories like cross-border and multi-currency payments. The
blockchain could help them convert currencies without intermediaries
like financial institutions. In one example, a card network could convert
one fiat currency to Bitcoin during transit and then to another fiat
currency once the payment reaches its destination. This could save on
exchange costs.
Connected Devices
Digital payment terminals will soon be added to everyday

appliances. Appliances like dishwashers, coffee machines, and refrigerators
will become connected to the internet over time. BI Intelligence forecasts that
there will be 5 billion consumer IoT device installations by 2020, up from 815
million in 2015. As these devices proliferate, some of them will have a
number of capabilities beyond internet connection. Samsung, for instance,
unveiled a smart refrigerator at this year's Consumer Electronics Show (CES)
that enables users to pay for groceries from their refrigerator via MasterCard.
If consumers adopt these appliances, they may start shopping for essential
goods from their home instead of going to the store. This behavior will help
boost mobile commerce.

Amazon's Dash buttons could also help drive the payments-enabled
device revolution. Last year, Amazon launched a one-click purchasing
device for Amazon Prime members called Dash. The key fob-sized device is
branded by select Amazon partners — such as Tide, Gillette, and Huggies —
and allows customers to re-order items with the push of a button. A number of
other brands have since hopped onboard the program. This year Amazon
also launched the Dash Replenishment Service, which is integrated directly
into products, enabling them to automatically order refills through Amazon.
Connected devices ultimately threaten payments companies that are

confined to physical store environments. For example, POS vendors like
Verifone and Ingenico have historically provided solutions for in-store
merchants. Products like Amazon Dash essentially replace these terminals
with personal devices that a household can use. POS providers will have to
find ways to integrate their technology into connected devices, otherwise they
will lose business as retailers selling essential goods see less foot traffic.

ACH
Another, more ordinary, payment method could displace some card

network revenue. ACH — automated-clearing-house transactions — will
likely grow in significance in the years to come. ACH transactions are often
used for automatic bill paying. The user links a checking account instead of a
payment card for recurring payments. This method can also be used for
payments through some mobile apps, including Venmo, which recently
suggested it would enable merchants, including in-store merchants, to take
payments via its app.
If ACH does make its way to more physical environments through apps like
Venmo, it would allow more transactions to bypass the card networks. Should
that happen, card networks could lose processing revenue from a
measurable share of transactions. Moreover, in the coming years, ACH
systems will move much faster, with payments clearing far more quickly than

in the past. This could make ACH more competitive with the existing system,
although it's unlikely to disrupt networks overnight.
Banks would have limited incentive to support these kinds of P2P payments,
since issuing banks collect significantly less money from an ACH-based
transaction compared to a card transaction. This could cause conflict
between merchants and issuing banks.
Wearables
Wearables will also play a role. Most major smartwatch manufacturers have
bought into the prospect of wearable-assisted mobile payments. Apple,
Swatch, Samsung, Jawbone, and Microsoft all include payments capabilities
on their respective smartwatches. These manufacturers could help lift mobile
in-store payments activity, particularly because they could make paying for an
item as simple as tapping your wrist against a terminal. However, this
payment technique still hasn't sunk in as a mainstream behavior.

The Bottom Line
 Events from last year will help shape the trends in payments in
2016. New security standards, new mobile payment options, and
heavy investments in the blockchain will cause a shift in the way
consumers, merchants, banks, and others handle payments in 2016.
 Changes in the ecosystem will help propel mobile payments this

year. Both mobile in-store payments and mobile commerce will
become more visible as merchant infrastructure is updated and as
buying options evolve. This will mainly benefit all players in the
ecosystem, and will also add new ones in, such as smartphone and
Secure Element manufacturers and security vendors.
 Alternative technologies pose a threat to many players in the

processing ecosystem. The blockchain, connected devices, and
even ACH could alter the landscape significantly by shuffling the
participating stakeholders involved in transactions.
 Expect more partnerships and collaboration in the

meantime. Regardless of the changes ripping through the payments
ecosystem, the bottom line is that payment processes involve a
complicated set of overlapping players relying on each other's
technologies. Because of this structure, startups will need to leverage
legacy providers' infrastructure to power payments, which will
necessitate more partnerships in the industry. This will create massive
new payments companies that co-exist alongside incumbents.

About BI Intelligence
BI Intelligence, a research service from Business Insider, provides in-depth insight, data, and analysis of
everything digital. Our research is fast and nimble, reflecting the speed of change in today’s business. We give
you actionable insights that enable smarter and better-informed decision-making. We publish in-depth reports,
news, and an exhaustive library of charts and data focusing on key areas of tech: payments, mobile, e-
commerce, digital media, the Internet of Things, and more.
To learn more please visit: intelligence.businessinsider.com
If your organization would like to learn more about our Payments research, including a license to
republish our charts and ask our analysts questions, please contact sales at
intelligence@businessinsider.com
Copyright © 2016 Business Insider, Inc. All Rights Reserved.

Proprietary and Confidential Property of Business Insider, Inc.
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Access to and use of this proprietary and confidential information is limited by the terms and conditions.

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THE PAYMENTS ECOSYSTEM REPORT:

Research Completed By:

Key Points Page 3

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 2

 The payments industry is going through a period of rapid

 2016 will be a watershed year for the payments

 Payments is an extremely complex industry. To understand where

 Mobile provides the common ground for many of the biggest

o The groundwork has been laid out for mobile in-store

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 3

o New mobile buying options will accelerate mobile

o Mobile peer-to-peer (P2P) money transfers will become

o Remittances is another massive industry being

o Direct carrier billing offers the option to have the purchase

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 4

 Alternative technologies could disrupt the processing

Payments is a complex and rapidly evolving space. It involves an intricate

In this report, we offer a high-level look at the payments industry — how it

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 5

Click here to download the charts and data in Excel »

Key Themes In Payments: 2015, 2016,

 New security standards were implemented. EMV — short for

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 6

 Mobile commerce matured. Although consumers have made mobile

 Software services moved to the foreground for merchants. Many

 Alternative payment infrastructures received heavy

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 7

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 8

The payment transaction is the foundational process that the payments

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 9

Processors are responsible primarily for data transmission and

There are two types of processors in the payment-card system: front-end

 Front-end processors route transactions from merchants to the

 Back-end processors are responsible for a fund's settlement, which

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 10

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 11

There is no significant difference between an ISO and an MSP; MSPs are

As mPOS drives down the overall cost of physical devices, a higher

 Independent Software Vendors (ISVs) create business-related

 Value-Added Resellers (VARs) integrate pre-made software

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 12

These organizations specialize in software, giving them an advantage over

But implementing a full POS system will continue to require a series of

Payment gateway businesses are specific to e-commerce companies, serving

Gateways have begun to play a more significant role in the ecosystem as

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 13

We expect gateways to play a more significant role in card processing in

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 14

There are three stages to payment-card processing, and each player

To illustrate each stage, we'll use a $100 credit-card transaction as an

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 15

Of course, this all happens in seconds. The next stages in payment

2. Batching And Clearing

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There are two important caveats:

 Debit-card transactions confirmed by a PIN are settled through a

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 17

 Transactions can also be settled in real time, meaning these

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 18

Visa and MasterCard — which represented 70% of payment-card transaction

In a closed-loop transaction, the POS terminal's processing engine reads a

Copyright © 2016, Business Insider, Inc. All rights reserved. intelligence@businessinsider.com 19

The closed-loop payments scheme has some distinct advantages, chief